Satuki @ Home

Do you think your family and friends(assume they are not traders like you) will understand you when you tell them that the first thing a trader learns is how to lose money. aka cutting losers? Would they confiscate your trading stake if you tell them something like “Sweety, I am so happy today because I just lost 500 dollars by selling Stock XYZ 10 minutes ago.” They perhaps would! They would also think you are nuts and a saboteur sent by some evil spirit to destroy the family financial order. The next thing they think is that you need to see a shrink.

Yeah, Yeah I know it is painful to watch a stop loss order kick in , take out your position and show a red number in your account. You can twitch,squirm,whine or bang your head against the wall or anything but remove your stop loss orders. And this rule is THE most important since one big loser will totally knock you out cold and you will perhaps NEVER recover from that one single big loss. It is more important than ridding winners, which is second most important in trading/investing. Ridding winners is much harder than cutting losers. We will talk about it in the future. Here are 2 real world examples that might help imprint this rule in your head permanently.

Example 1:

A friend of my husbands’ bought CROX @ 39.32 sometime in Nov. 2007. It is around point 1 in the picture below. He thought it was cheap (another trading sin,aka catching a falling knife). Then It dropped another 10% all the way through the previous low. I did not know why it dropped. But I know it was very dangerous since it cracked a very important support. I told him to get out. But he said it would come back since it was this good and that solid company. As we can see from the picture, it kept tanking util it hit around 28. Then there was a dead cat bounce very possibly caused by the shorts covering. That friend of my husbands called me 3 times in one day and told me how strong his willpower was to hold onto that loser. What I told him was that strong willpower was much needed in holding onto a winner not a loser. Of course he did not budge. What he felt back then must be like what Tom Hanks felt when he saw a boat after he talked to volleyball named “Wilson” for years in the movie Cast Away. So tanking it kept… When it hit 10, his first reaction was “it is already 10, how much lower can it go?”. As we can see from the picture, how much lower it went.

Example 2:

I went long @54.83 on SIGM, which formed a small doji star after a pullback in a big uptrend(around point 1). It was a high probability set-up. But it died the second day. I lost 8% on that one. If it were you, would you be happy to cut it? I know I am. So I think you really should give yourself a round of applause each time you cut a loser. As I said in the past, losers are like tumors. You must cut them as soon as possible. If you still can not do it, you can put a picture of a disgusting tumor on your trading desk to help you remember that. I tried to look for some tumor pictures. But they are so disgusting that I do not want to ruin your appetite for dinner tonight.

Safe trading.